1. In the market for widgets, 800,000 units are currently being sold every year at the going price of $10/widget. The elasticity of supply at this point has been estimated to be 1.25. On the other hand, studies of consumer behavior in this market have found that buyers reduce their quantity demanded by 25% on average in response to a 10 percent increase in the price. A new bill has been introduced that would impose a $3 tax per widget.

a)Proponents of the bill claim it would raise $2.4 million in government revenue every year. Are they right? Explain.

b)The widget producers' association opposes the bill arguing that, if enacted, it will reduce the industry's production of widgets by 300,000 a year. Is their claim justified? Explain.

c)A consumer organization also came out against the tax, arguing it will end up costing them an additional $1.8 million a year. Is that correct? If so, show why. If not, could you propose an alternative measure to better quantify how much worse off consumers are because of the tax?